Money and Banking Winter Day 1 Dr. Andrew L. H. Parkes “A Practical Understanding for use in Business” 卜安吉

November 27, 2012Money and Banking, Day 12 U.S. inflation and its trend, % 3% 6% 9% 12% 15% long-run trend % change in CPI from 12 months earlier

November 27, 2012Money and Banking, Day 13 The connection between money and prices Inflation rate = the percentage increase in the average level of prices. Inflation rate = the percentage increase in the average level of prices. Price = amount of money required to buy a good. Price = amount of money required to buy a good. Because prices are defined in terms of money, we need to consider the nature of money, the supply of money, and how it is controlled. Because prices are defined in terms of money, we need to consider the nature of money, the supply of money, and how it is controlled.

November 27, 2012Money and Banking, Day 14 What is Money: Definitions Money is the stock of assets that can be readily used to make transactions Money is anything that is generally accepted in payment for goods and services

November 27, 2012Money and Banking, Day 15 What is Money…(cont.) It is important to distinguish between money, wealth and income: Money Money –Stock Wealth: Money + Assets Wealth: Money + Assets –Stock Income: earnings at a point in time Income: earnings at a point in time –Flow Flow Stock

November 27, 2012Money and Banking, Day 16 Classifications of Money In the United States: In the United States:  M1 = Currency + Traveler's Checks + Demand Deposits + Other Checkable Deposits  M2 = M1 + Small denomination time deposits & repurchase agreements + Savings Deposits and money market deposit accounts + Money Market mutual fund shares (noninstitutional)  M3 = M2 + Large denomination time deposits and repurchase agreements + Money Market mutual fund shares (institutional) + Repurchase Agreements + Eurodollars [Note: As of March 2006, the Fed has discontinued M3] See: See:

November 27, 2012Money and Banking, Day 17 Money supply measures, April 2006 $6799 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M2 $1391 C + demand deposits, travelers’ checks, other checkable deposits M1 $739CurrencyC amount ($ billions) assets included symbol

November 27, 2012Money and Banking, Day 18 Money: Functions Medium of Exchange we use it to buy stuff Medium of Exchange we use it to buy stuff Store of Value transfers purchasing power from the present to the future Store of Value transfers purchasing power from the present to the future Unit of Account the common unit by which everyone measures prices and values Unit of Account the common unit by which everyone measures prices and values  Money helps to: –Lower transaction costs –Increase Liquidity in an economy

November 27, 2012Money and Banking, Day 19 Money as a Medium of Exchange Def: A medium of exchange is any object that is accepted in exchange for goods and services Def: A medium of exchange is any object that is accepted in exchange for goods and services Examples of medium’s of exchange: Examples of medium’s of exchange:  Barter  Cigarettes (WWII POW Camp)  Credit Card Barter – goods and services exchanged directly for other goods and services Barter – goods and services exchanged directly for other goods and services –“Double Coincidence of Wants”

November 27, 2012Money and Banking, Day 110 Money as a Unit of Account No unit of account: No unit of account: Money as a unit of account: The opportunity cost of one movie is 24 sticks of gum. Money as a unit of account: The opportunity cost of one movie is 24 sticks of gum. Good Price in units of another good Movie 2 six-packs of soda Soda 2 ice-cream cones Ice Cream 3 packs of jelly beans Jelly Beans 2 sticks of gum Gum 1 local phone call

November 27, 2012Money and Banking, Day 111 Money: Types 1. Fiat Money –has no intrinsic value –example: the paper currency we use 2. Commodity Money –has intrinsic value –examples: gold coins, cigarettes in P.O.W. camps (also in film: The Shawshank Redemption starring Tim Robbins and Morgan Freeman)

November 27, 2012Money and Banking, Day 112 Evolution of Payments System Precious metals like gold and silver (commodity money) Precious metals like gold and silver (commodity money) Paper currency (fiat money) Paper currency (fiat money) Checks Checks Electronic means of payment Electronic means of payment Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash Electronic money: Debit cards, Stored-value cards, Smart cards, E-cash

November 27, 2012Money and Banking, Day 113 What can serve as money? Commodities must satisfy the following properties to serve as money: Widely accepted Widely accepted Standardized Standardized Divisible Divisible Easy to carry Easy to carry Not deteriorate easily Not deteriorate easily

November 27, 2012Money and Banking, Day 114 Discussion Question Which of these are money? a. Currency b. Checks c. Deposits in checking accounts (“demand deposits”) d. Credit cards e. Certificates of deposit (“time deposits”)

November 27, 2012Money and Banking, Day 115 Best Definition of Money…? What happened to money in: 1968 – 71 Post 1989  Different stories about what happened to money

November 27, 2012Money and Banking, Day 116 Reliability of Money Data Problems arise because: Lack of frequency in reporting deposits Lack of frequency in reporting deposits Seasonal variations Seasonal variations  Focus on long run monetary movements!

November 27, 2012Money and Banking, Day 117 The money supply and monetary policy definitions The money supply is the quantity of money available in the economy. The money supply is the quantity of money available in the economy. Monetary policy is the control over the money supply. Monetary policy is the control over the money supply.